Why Your Clients’ Company Offered Life Insurance Isn’t Enough

You already know your client doesn’t have enough life insurance if the only policy he owns is the one that was offered to him free, from his employer, but how do you get the him to understand this? In an article published in USA Today, author, Alice Holbrook spells out the BIG reasons why only owning an employer-sponsored life insurance policy isn’t a wise decision. Holbrook states, “Employer-sponsored life insurance is a great benefit, but it doesn’t always offer enough protection. Workers with big financial obligations — like mortgages and children — should consider buying an additional, individual plan.”

If your company provides free or low-cost life insurance as a benefit, it can be tempting to check that item off your to-do list. After all, at least your family can afford your funeral and probably have some money left over.

But take another look and you might well find that you still need a supplemental policy. “Most company policies … fall well short of filling the overall life insurance needs,” says John Buerger, wealth coach at ALTUS Wealth Solutions in San Luis Obispo, Calif.

Employer-sponsored life insurance is a great benefit, but it doesn’t always offer enough protection. Workers with big financial obligations — like mortgages and children — should consider buying an additional, individual plan.

How much life insurance do you need?

The main reason to buy life insurance is to provide for your dependents in the event of your death, says Pamela Plick, a certified financial planner based in Palm Desert, Calif. So single people without children, or older people with grown children and no mortgage, might not need much or any coverage.

But workers with families may well need more than what they would get from employer-provided life insurance, which is rarely more than three times one’s annual salary, and can be as little as six months’ salary.

Robert Henderson, a financial advisor at Lansdowne Wealth Management in Mystic, Conn., recommends that a “typical midlife adult with children” should have total coverage equal to 10 times one’s annual income.

Your needs may well be less, depending on whether your spouse works, how many children you have and how much money you have saved. Life insurance calculatorscan help.

How do company policies stack up?

Relatively low benefits are not the only reason workers should consider supplementing coverage. Employers may drop life insurance benefits, or employees may change jobs and find their policy isn’t portable. “They could leave their employer at a time where a medical condition could prevent them from obtaining replacement insurance,” Plick says.

Should you get employer-sponsored life insurance?

Even if you need more life insurance, you may want to keep your company policy, especially if it’s free. More protection is often better, and for some employees, there are major advantages. For example, employer-sponsored plans usually don’t require underwriting or medical exams.

“If a person is uninsurable or in a high risk class, group coverage may offer a level of coverage or rates that would otherwise be unavailable,” says James Dowd, a financial analyst at North Capital in San Francisco. “On the other hand, a person in a low risk class … is more likely to find better coverage through the open market than through a group plan.”.

If your company plan is pricey, and you have alternatives, shop around. “There is no need to pay too much for insurance just because the cost is being taken from your paycheck,” Buerger says.

The bottom line

If you’re an older employee with a paid-off house and grown children, your employer-sponsored coverage might be enough. In fact, it might be the only affordable life insurance you can get. Single adults, or those without a mortgage, might also be fine without a supplement. But for younger workers with families, it’s important to consider additional coverage.

Henderson reminds applicants to read the fine print when selecting a policy. “Some policies can be very cheap because the stipulations are very strict. For example, if you are a commercial or recreational pilot, you don’t want a policy that does not provide coverage for death while flying,” he says.

And once you have coverage, schedule regular meetings with your agent or advisor to reassess your policy. “I would advise every three to five years, or whenever an individual experiences significant life changes,” Dowd says.